BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -The purchases returns and allowances account is a contra account to purchases since it reduces purchases by the number of returns and allowances. In purchase returns, a customer purchases a defective product and returns it to the seller for a full or partial refund.

Detailed explanation-2: -The account contains deductions from purchases for items returned to suppliers, as well as deductions allowed by suppliers for goods that are not returned. This contra account reduces the total amount of purchases made, which therefore also reduces the ending inventory balance.

Detailed explanation-3: -The net balance of Purchase Expenses on an income statement is calculated as the difference between a company’s gross purchases and all associated contra expenses like Purchase Returns, Allowances and Discounts.

Detailed explanation-4: -Accounting for Purchase Returns Purchases will normally have a debit balance since it represents additions to the inventory, an asset. The contra account purchases returns and allowances will have a credit balance to offset it.

Detailed explanation-5: -COGS = Beginning inventory + purchases + Freight In – Ending inventory – Purchase Discounts – Purchase Returns and Allowances.